G8 agrees to balance austerity with dose of stimulus, supports Greece in eurozone

G8 agrees to balance austerity with dose of stimulus, supports Greece in eurozone

CAMP DAVID, Md. – World leaders backed keeping Greece in the eurozone on Saturday and vowed to take all steps necessary to combat financial turmoil while revitalizing a global economy increasingly threatened by Europe’s debt crisis.

A summit of the G8 leading industrialized nations came down solidly in favor of a push to balance European austerity – an approach long driven by German Chancellor Angela Merkel – with a dose of U.S.-style stimulus seen as vital to healing ailing eurozone economies.

“We commit to take all necessary steps to strengthen and reinvigorate our economies and combat financial stresses, recognizing that the right measures are not the same for each of us,” leaders said in a bold statement issued at their meeting at the Camp David presidential retreat in Maryland.

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The message sent by the summit hosted by President Barack Obama reflected his own concerns that the eurozone contagion, which threatens the future of Europe’s 17-country single currency bloc, could hurt the fragile U.S. recovery and his own re-election chances in November.

In their final economic communique, the Group of Eight leaders welcomed discussions in Europe to broaden the focus to more pro-growth remedies and said: “We reaffirm our interest in Greece remaining in the eurozone while respecting its commitments.”

It was unusual for the often-bland G8 communique to single out a relatively small nation. But fears that a political stalemate in Greece would lead to its departure from Europe’s monetary union at unknown costs to the financial system and global economic stability have spooked markets.

Spain too has roiled markets by revealing huge bad loans in its banking system as it struggles to rein in its budget while facing recession.

“It is significant that a group as weighty as the G8 backs Greece and reinforces the idea that Europe needs a strong union. It strengthens its hand,” said Marc Chandler, currency strategist at Brown Brothers Harriman.

In another move to shore up shaky global growth, the G8 leaders said they would monitor oil markets closely and stand ready to seek an increase in supplies if needed. While crude oil prices have declined by 10% over the past month, the threat of sanctions on Iran loom next month.

The mountain cabins at Camp David where a shirt-sleeved Obama hosted the G8 leaders contrasted with recent tense meetings in European capitals about a sovereign debt crisis that just keeps getting worse.

The economic communique endorsed a recent political shift away from the budget-cutting austerity that has been championed by Merkel and British Prime Minister David Cameron as the route to prosperity.

Instead it recognized a common need to combine budgetary discipline with a growth strategy. This strengthens the hand of newly elected socialist French President Francois Hollande before a crucial European Union dinner on Wednesday to discuss growth.

The eurozone crisis took another lurch downward late last week when Spain revealed huge losses in its banking system and partially nationalized Bankia.

‘Contingency plans, the strengthening of banks, governance, firewalls – all of those things need to take place very fast’

Cameron, after an early morning gym workout with Obama, said he detected a “growing sense of urgency that action needs to be taken” on the eurozone crisis. London relies heavily on international finance and banking instability would strike a fresh blow to an economy already in recession.

“Contingency plans need to be put in place and the strengthening of banks, governance, firewalls – all of those things need to take place very fast,” he told reporters.

European leaders seemed keen to stress that they would stand firm in protecting their banks, after news of escalating bad loans raised the specter that rescuing Spain’s banks would crash the eurozone’s fourth largest economy.

“We will do whatever is needed to guarantee the financial stability of the eurozone,” European Union President Herman Van Rompuy said, using language that ended up in the statement.

Hollande suggested using European funds to inject capital into Spain’s banks, which would mark a significant acceleration of EU rescue efforts. But there was no direct mention of Spain in the communique or any indication of action leaders would take to combat the financial stresses.

GERMANY SOFTENING ON AUSTERITY

There already were signs of a softening in Germany’s austerity stance as the meeting on the global economy began.

Germany’s largest industrial union, IG Metall, struck its biggest pay deal in 20 years early on Saturday. The 4.3% pay increase, more than double Germany’s inflation rate, will boost worker buying power in the eurozone’s richest nation and lift consumption. That is something the United States has urged as a means to bolster overall growth throughout the world’s second largest economic region.

In the G8 group photo outside the presidential log cabin, Obama also sought balance. He stood with the leaders of Europe’s two largest powers – France and Germany – to his right and his left respectively.

G8 leaders also raised pressure on Iran over its nuclear program, which they suspect has military objectives, by committing to a common approach. They pledged to implement sanctions fully against Tehran and indicated they would act together to lower oil prices if needed.

“Our hope is that we can resolve this issue in a peaceful fashion that respects Iran’s sovereignty and its rights in the international community, but also recognizes its responsibilities,” Obama told reporters.

The Camp David summit kicked off four days of intensive diplomacy that will test world leaders’ ability to quell unease over the threat of another financial meltdown as well as plans to wind down the unpopular war in Afghanistan.

After the Camp David talks wrap up late on Saturday, Obama will fly to his home town of Chicago where he will host a two-day NATO meeting at which the Afghanistan war will be the central topic.